When Do You Pay Closing Costs?

When Do You Pay Closing Costs?

Closing Costs are one of the fees that are expected when purchasing a home, however, what many people don’t know, is that you have to pay these fees during other real estate transactions as well.

Generally speaking, closing costs can range from 2-5% of the purchase price of the home for buyers, but contrary to common belief, closing costs are also paid during other transactions including refinancing a home loan. Closing costs include a large range of different fees such as appraisals, home inspections, mortgage broker fees, application fees, attorney fees, title fees, mortgage insurance, etc., and thus can range pending on the purchase price, lenders, as well as a handful of other factors. 

Related: Can a buyer walk away from a contract to purchase a home?

Buying a Home

When buying a home, it is always recommended to budget a minimum of 3% of the purchase price to go toward your closing costs. While the exact percentage could vary pending on your lender, loan type, etc. budgeting for 3% is the general rule of thumb. For example:

  • Purchase Price: $400,000
  • 3% of $400,000 = 12,000
  • Estimated Closing Costs = $12,000

Selling a Home

Oftentimes people believe that there aren’t closing costs associated with selling a house, however, this couldn’t be further from the truth. Your broker’s commission is a part of your closing costs associated with selling your home and is generally a fairly high rate and ends of being the majority of your closing costs. When selling a home, a seller can easily reach up to closing costs of 8% of the sale price.

Refinancing a Home

You may see “no closing cost refinance” being promoted with multiple different lenders, however nearly all refinances will have closing costs ranging from 2-6% of the new loan amount. In most cases, even if you try to use a no closing cost refinance, you are often going to paying a higher interest rate than that of a refinance that has closing costs, as it is the lender's way of making up some of the fees that were “waived.”

Related: The Mortgage Payoff Banks Don't Want you to know about

If you have questions regarding closing costs, loan types, interest rates, or what options are available to you, make sure to speak to your lender in-depth to ensure that you fully understand all the options and what they entail. Closing costs can easily eat into your profit during a sale, put you over budget during a purchase, or even offset the potential savings of a refinance so it is vital that you understand them prior to purchasing, selling, or refinancing a home.

 Additional Resources for Buyers and Sellers

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